Current Issues in the Negotiation of Hotel Tri-Party Agreements – 2008
For first-time hotel developers accustomed to office or retail projects, it may seem unsurprising
that a draft management agreement requires that the owner and any future mortgage lender be obligated
to enter into a three-party “Subordination and Non-disturbance Agreement” or “Recognition Agreement”
with the management company. This type of agreement, as described in a typical draft management
agreement presented by a brand management company, provides that the management company agrees
to “subordinate” and “attorn” to the lender upon its acquisition of the hotel through default or foreclosure.
The lender in turn is obligated not to “disturb” the management company unless it is in default of its
obligations under the management agreement. In terminology and outline, the agreement seems very
much like a subordination and non-disturbance agreement or SNDA entered into with a valuable tenant.
In practical effect and its role in the value of the hotel, however, the hotel three-party agreement acts very
differently.
In a typical SNDA used for office buildings and retail centers, the tenant is entitled and required to
continue its lease in place after a loan default. Such provisions are often welcomed by secured lenders
seeking to retain leases and rental income otherwise terminable upon a foreclosure. Some inexperienced
hotel developers/owners therefore sign management agreements with non-disturbance requirements in
the early stages of a project, assuming that the provision will not be problematic for future lenders. The
hotel developers discover as a substantial and unpleasant surprise that many lenders regard such
provisions as making the hotel less valuable and even unacceptable as collateral. The developer/owner
is then caught between the costs and risks of seeking a modification of the provisions in the management
agreement, or the costs of posting substantial additional collateral, if a lender will in fact accept that as an
alternative and solution.
Prior to the recent and continuing problems in the credit market, lenders originating hotel loans for
the CMBS market were frequently willing to include non-disturbance assurances in their loan documents
and to comply with most or all of what the management agreements required. There were a number of
reasons for this. First, as we have seen across the CMBS market, originating lenders were indifferent to
many risk factors if those factors were not perceived to have immediate impact on the resale price of the
loan. Originating lenders expected to hold loans only momentarily, and thus did not look at risks beyond
a very brief holding period. Second, several CMBS lenders were driven by interest in deal flow to develop
formal and informal alliances with hotel management and franchise companies. Some of these
management and franchise companies were also providing “credit enhancement” to the lender to facilitate
and improve the resale value of the loans into CMBS pools. Third, several major Wall Street and similar
financial group were engaged in both first lien and mezzanine lending on hotels, and anticipated retaining
the mezzanine loans but selling the senior debt. As mezzanine lenders, they could prefer that the senior
lender had less power to change the character of the hotel. Such mezzanine lenders also could align
themselves with the branded hotel management companies. Fourth, institutional and conventional
lenders mimicked the documents of the CMBS market, because they considered the CMBS market a
possible but secondary exit strategy for their loan portfolios. Language was copied into institutional loan
documents with minimal understanding of the consequences of the language.
In fact, there was some knowledge in the CMBS market that non-disturbance agreements were a
negative factor in longer term loan performance. CMBS rating agencies had for some time given
“guidance” in their lending criteria that hotel management agreements should be terminable upon loan
default. While unexplained in the guidance statements, this was thought to preserve an ability to deal
flexibly with hotel collateral and to maximize the amount and speed of recovery of value. “Guidance”
however did not establish an absolute or even firm requirement for CMBS origination, and hotel loans
could clearly be securitized without including a provision for termination upon loan default or foreclosure.
The competition by lenders to make hotel loans resulted in many loans with non-disturbance provisions,
with little apparent negative effect on their value when securitized or sold into pools. Lenders making only
occasional hotel loans seemed to follow these CMBS lenders in their loan documents.
More experienced hotel lenders lending for their own account took a different approach. These
lenders were more often involved in loans for initial development and more complex financing. As a
class, these lenders were noticeably more insistent that hotel management companies must be subject to
removal at the option of the lender and without compensation after loan default. The lenders were very
interested in three-party agreements that would facilitate keeping property in stable operation through
default and a transition to restructured or new ownership. They were however opposed to nondisturbance assurances. In the logic of these lenders, the most common causes of losses on hotel loans
could be traced to the wrong brand affiliation for the relevant market, the failure of a brand-affiliated
management company to manage up to the projections used in underwriting, and the very slow and
expensive process of changing management entrenched by a non-disturbance provision. Giving a
management company the right to remain after a loan default was thought to add to the barriers to
dealing efficiently with these causes of loss. The lenders’ conclusion was that they should refuse a nondisturbance provision which might force a lender and/or owner to take an unsatisfactory management
company through a long and expensive removal process via bankruptcy or foreclosure or other litigation.
If that failed, it could leave the lenders with an intractable problem and an undersecured loan. With
lenders in an over-heated CMBS market offering to accept non-disturbance requirements, these more
demanding lender had to choose between lowering their standards and making loans to those market
sectors – such as hotel development and mini-perm takeout loans – where CMBS lending was not as
competitive or unavailable.
As a result of this historic split in approach to three-party agreements, we currently have at least
two classes of outstanding loans secured by hotels. These two classes have very different prospects for
refinancing and sale. CMBS analysts at rating agencies had become increasingly critical of hotels loans
in CMBS pools, even before the current deterioration of the commercial credit market. That criticism was
based on the empirical data showing that hotel loans were among the worst performing CMBS loan
categories, generally rivaled only by health care facilities in both default rates and total losses. The
analysts did not trace this poor record to specific factors, but commented generally that hotels and health
care properties had proven to be far more like operating businesses than real estate investment. Only
Wall Street seemed to be surprised by this. The CMBS market is now largely closed to hotel borrowers.
Some unsophisticated bank lenders – mainly from regional banks – are lending into this vacuum.
Whether that will continue in face of growing criticism from bank regulators is unclear but doubtful.
More sophisticated lenders are now returning to the hotel market. They are obtaining the threeparty agreements with termination rights that they have wanted and which, prior to the irrational
exuberance of CMBS lending, were routine. What these lenders know, and what major brand companies
can be brought to admit, is that when the lender has a right to remove the management company upon
default, the right has, to date, frequently not resulted in a forcible removal.
The practical effect of a provision for termination, and a goal in requiring it, is that the provision
creates a positive alignment between owner and management company. Both need to operate the hotel
to pay its secured debt and to achieve a sustained level of profitable performance to allow it to be
refinanced upon maturity of the existing loan. In the current market, default at maturity due to inability to
refinance is the primary cause of loan failure. The prospect of termination puts pressure on all parties to
negotiate modified terms to facilitate refinancing and avoid foreclosure or bankruptcy. In that negotiation,
the high cost of rebranding motivates the lender to seek only changes in operation essential to create or
protect value to support refinancing. The lender will continue the brand in place if possible. At the same
time, the certainty that the management contract can be ended reduces the incentives for the
management company to resist those changes or try to hold the lender and owner hostage. The
owner/borrower has some motivation to take steps and invest new equity to bridge any gap and so to
protect its equity. Thus, the result of a more certain power to terminate may be that substantially less cost
and time is spent in the restructuring process and the outcome is better. This reduces the overall loss on
the hotel loan to the lender, and may tip the balance toward a successful outcome for the lender and
sometimes for the owner.
In any difficult credit environment, leverage in negotiation clearly swings back to the lender.
Unsurprisingly, this is what we see in the current market. In future loan transactions, three-party
agreements providing for subordination and attornment, without non-disturbance, are more likely to be
required. Lawyers representing owners are well advised to assume that non-disturbance rights may be
refused by first-lien lenders in future transactions. Current borrowers may need to take steps to remove
those terms from their management agreements in order to be eligible for refinancing in the future.
Of the agreements now routinely included in the documentation of hotel financings, the threeparty of “tri-party” agreement among the lender, operator and owner remains one of the forms most
substantively negotiated. (Three-party agreements covering franchises have somewhat less significance
for lenders and are less likely to be negotiated.) The broad scope of the negotiation reflects that the
parties are dealing with a core conflict of business interests well understood by experienced lender and
any established management company, even if the conflicts are not fully appreciated by the developer or
owner. There is no “standard” agreement which reflects a general “market” understanding of where the
parties will come out on the terms. Much will turn on what the management company has already
contracted to do in its management agreement. A management company already subject to
performance-based termination rights and to rights of the borrower to obtain financing with subordination
of the management agreement may take a very different approach than a management company which
regards itself as insulated from risks of termination. Properly drafted on the part of a lender, a tri-party
agreement will assure that there are options for the secured lender to control and change the
management terms after a default. This form of agreement is intended to maximize the chances of
successfully recovering asset value. A tri-party agreement in the current market can be seen as part of
the price paid by the management company and owner for the lender to be willing to lend on a hotel, from
which they will profit. In contrast, a non-disturbance agreement was previously one part of the
concessions a hotel lender was asked to make to obtain loan business in a highly competitive market.
Negotiation among the parties may cover topics such as the notice periods, the scope of the
obligations to fund operations during defaults, and the level of capital funding to maintain a standard of
operation after default. Notice obligations, timetables for decisions on the brand, and standstill
obligations during litigation will be covered. There may be negotiation over clauses in the tri-party
agreement which have been added to override or amend existing clauses in the management agreement.
In some transactions, the lender will require permanent amendment of the management agreement to
subordinate the management agreement to any future lender. This is the preferred approach if the goal is
to enhance the lender’s exit strategy by reestablishing the borrower’s ability to refinance on maturity of
the current loan. Changes made only in the current tri-party agreement do not improve the odds of a
future successful refinancing. If the management agreement is not itself amended, any future lender will
again be asked accommodate the inconsistent and unacceptable terms of the underlying management
agreement. Indeed, one of the major frustrations in enforcing tri-party agreements is the frequency with
which inconsistent terms are left unamended in other loan documents and the management agreement.
In the hands of a future holder or an inexperienced servicer, such inconsistencies become serious and
unpredictable areas of uncertainty. With more hotels heading into special servicing, these defects in
drafting are more and more apparent and are causing added administrative expense and losses.
A lender now seeks to balance several goals in its form of tri-party agreement. It wants to provide
for the stable operation of the hotel in the immediate pre- and post-default period by continuing the
existing management, whether or not that management is otherwise satisfactory. Secured lenders have
learned in workouts that hotels are uniquely vulnerable to a loss of value if normal operation is disrupted.
Value is preserved by some level of continued or transitional management by the existing management
company, even if the management is unsatisfactory in other ways. Management companies obviously
seek to be retained, but do not want to continue only on an interim basis.
Balanced against the shared goal of stability is the conflict of the lender’s and management
company’s aims in regard to long term value and recovery. The lender faces a potential problem in that it
may have to defend against the current management company’s future claims as a creditor. Those
claims will be used to promote the management company’s goal of continuing its operation or being well
paid for surrendering management. The lender will also have to deal with the possibility and indeed
likelihood that current management will have contributed to any overall failure of the hotel, in some cases
by misconduct or breach of its contract or fiduciary duties. As a practical matter, the secured lender
needs assurance that it will prevail if the management company seeks to control or use revenues to repay
compensate itself for early termination in priority to the lender. The lender wants to know and control
what is subject to repayment prior to the lender’s claims.
In a tri-party agreement, a secured lender does accept some obligation to pay the costs of
operation and current fees for any period in which it requests or requires the management company to
continue to manage. Recently, some inexperienced lenders and in particular servicers have tried to
sweep hotel revenues into lockbox accounts and refuse to return funds to the hotel to cover essential
operating costs. Indeed, some hotel loans seem to have been analyzed or rated on the assumption that
the revenues and reserves would belong to the lender. This is unwise and has in some cases badly
damaged the value of distressed hotels. Allowing a prudent level of funds to be made available for
operation is a concession based on a realistic reading of the lender’s options. Few if any courts will
enforce a provision that requires a third-party management company to operate a hotel without
reimbursement and payment of some level of fees. Even affiliated management companies will be
allowed a level of funding out of revenues. Neither a tri-party agreement nor a court is likely to require
that the secured lender take on an obligation to make or allow payments from revenues for debts of prior
periods. There will generally not be an obligation to compensate the management company for early
termination due to default. This is a balance with which courts have proven comfortable, based on the
understanding that the management company has had a sufficient role in the success or failure of the
hotel to put its contract at risk when the hotel fails. At the same time, a hotel management company is
entitled to reasonable compensation for continuing services.
A tri-party agreement also serves increasingly as an intercreditor agreement in the financial
sense. In a hotel foreclosure or bankruptcy, the management company or franchisor is likely to be a
creditor with one of the largest unsecured or undersecured claims. Intercreditor issues are complicated
further in developments where the management company and its affiliates may have multiple roles,
including those of developer, time share operator or sponsor, sales agent of condos, or a mezzanine
creditor. The form of tri-party agreement attached here touches on, but does not deal comprehensively
with such intercreditor issues. If management or development agreements include provisions which
make large unsecured claims possible or probable (such as provisions for unlimited accrual of fees,
advances by the management company or large termination penalties due to the management company
from the borrower on loan default), more detailed intercreditor clauses may be required. Where the
management company and its affiliates have multiple roles, the potential need to separate those roles
must be considered. A lender may require that the roles be separately documented, that different entities
be assigned to the roles, and that those entities have different rights on default. Finally, the tri-party
agreement needs to focus specifically on how the parties will deal in bankruptcy. Due to the greater
clarity of bankruptcy law and its flexibility in dealing with secured, undersecured and unsecured claimants
in a single forum, bankruptcy court is the most likely and desirable venue for the resolution of a major
hotel loan default. Intercreditor terms may need to extend to provisions for voting, procedures and rights
in valuation and other aspects of creditors rights in bankruptcy.
The form of tri-party agreement attached here also deals with the management company's role in
obtaining and administering a loan. While the loan application is nominally made by the owner, the
financial information, business plan and on-going reporting compliance will come from the operator.
When a default occurs, the undisclosed commitments of the owner and any undisclosed profits to the
operator may become major issues. This form requires representations from the operator as to certain
aspects of its actions relating to the loan.
We do not anticipate a full return to the conditions of lending in the CMBS market. The tri-party
issue of non-disturbance was a major issue but not the only point of confusion and error in the
underwriting, administration and servicing of hotel loans. Analysts were also correct that hotel lending
has a much greater element of lending to an operating business than was well suited to the CMBS
system of lending. We continue to look toward more hotel lending being conducted on terms and in
markets more closely associated with corporate lending and lending to operating business. Tri-party
agreements will continue to develop in the direction of complex stand-by operating agreements between
managers and lenders, who acts in anticipation of becoming future owners.
TRI-PARTY AGREEMENT
BY AND AMONG
________________
as OWNER
________________
as SECURED LENDER
And
________________
as OPERATOR
Hotel:
____________________________________
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS .............................................................................................................................. 2
1.1
Definitions .................................................................................................................................. 2
ARTICLE II PLEDGE .................................................................................................................................... 6
2.1
2.2
Pledge of Management Agreement ........................................................................................... 6
Operator's Agreement ............................................................................................................... 7
ARTICLE III REPRESENTATIONS REGARDING MANAGEMENT AGREEMENT ..................................... 7
3.1
Representations as to Management Agreement ....................................................................... 7
ARTICLE IV COVENANTS OF OWNER ....................................................................................................... 8
4.1
Covenants of Owner as to Management Agreement ................................................................ 8
ARTICLE V COVENANTS OF OPERATOR ................................................................................................. 9
5.1
Covenants of Operator as to Management Agreement ............................................................ 9
ARTICLE VI SUBORDINATION OF RIGHTS OF OPERATOR ................................................................. 11
6.1
6.2
6.3
Subordination of Rights of Operator ........................................................................................ 11
Subordination of Rights of Operator and Affiliates to Payment from Accounts ....................... 11
Subordination of Interest of Operator in other Assets of Owner ............................................. 13
ARTICLE VII CONTINUATION AFTER TRANSFER .................................................................................. 13
7.1
Continuation after Transfer ...................................................................................................... 13
ARTICLE VIII RELATIONSHIPS .................................................................................................................. 16
8.1
Relationships ........................................................................................................................... 16
ARTICLE IX INSURANCE ........................................................................................................................... 16
9.1
Insurance ................................................................................................................................. 16
ARTICLE X CONDEMNATION .................................................................................................................... 17
10.1
Condemnation ......................................................................................................................... 17
ARTICLE XI BINDING EFFECT .................................................................................................................. 17
11.1
Binding Effect........................................................................................................................... 17
ARTICLE XII MISCELLANEOUS ................................................................................................................. 17
12.1
12.2
12.3
12.4
12.5
12.6
12.7
12.8
12.9
12.10
12.11
12.12
Notices. .................................................................................................................................... 17
Non-Competition ...................................................................................................................... 17
Lender's Right to Inspect ......................................................................................................... 17
Partial Invalidity ....................................................................................................................... 17
Time of the Essence ................................................................................................................ 18
Lender Discretion .................................................................................................................... 18
Gender ..................................................................................................................................... 18
Modification, etc ....................................................................................................................... 18
Further Assurances ................................................................................................................. 18
Estoppel Certificates ................................................................................................................ 18
Counterpart Execution ............................................................................................................. 19
No Third Party Beneficiaries .................................................................................................... 19
12.13
12.14
12.15
12.16
12.17
12.18
12.19
12.20
EXHIBITS
A
B
C
Waiver, Entire Agreement ....................................................................................................... 19
Captions ................................................................................................................................... 19
Interpretation............................................................................................................................ 19
Governing Law ........................................................................................................................ 19
Owner's Limited Liability .......................................................................................................... 19
Compliance with Equal Opportunity Law and Regulations ..................................................... 19
Jury Trial Waiver ...................................................................................................................... 20
Liens ........................................................................................................................................ 20
-
Legal Description of the Land
License Agreement
Accounts
TRI-PARTY AGREEMENT
This Tri-Party Agreement (the "Tri-Party Agreement") is made as of _____________,
_____ by and between _____________________, a _________________________ ("Owner") having
offices at _____________________, _______________________, a _____________ ("Operator") having
offices at ____________________, and __________________________, a ______________________
("Lender") having offices at _____________________________________________.
RECITALS:
A.
Owner is the owner [and operator through its manager as agent1] of a certain
hotel project commonly known as the [hotel name] and located at [include street address] on property
more particularly described on Exhibit A.
B.
Owner and Lender intend to enter into that certain Loan Agreement [of even date
herewith], as the same may be amended, restated, modified or supplemented from time to time (such
agreement, as in effect from time to time, being hereinafter referred to as the "Loan Agreement"),
pursuant to which Lender will agree to make a loan to Owner in the original principal amount of
DOLLARS ($
) (the "Loan") for the uses and purposes set forth in the Loan Agreement (all
capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Loan
Agreement2).
C.
Pursuant to the terms of the Loan Agreement, Owner will, among other things,
execute concurrently herewith and deliver to Lender: (i) a Promissory Note in the original principal amount
of $
(the "Note"), which is secured by 3: (a) a [Real Estate Mortgage] and Security Agreement
[and Assignment of Rents] (the "Mortgage"), (b) a Security Agreement and Assignment of Contracts (the
"Assignment of Contracts") and (c) a Collateral Assignment of Leases and Rents (the "Assignment of
Leases"), encumbering the collateral described therein, including the Land. (The Loan Agreement, the
Note, the Mortgage, the Assignment of Contracts, the Assignment of Leases, and all other documents
________________________
1
This agreement, like the standard forms of hotel management agreement and loan agreement
included in this series, assumes that the operator functions as the agent of Owner in operating
the Hotel. If the operator is not an agent, the rights of Lender may be materially affected. For
example, Lender may not receive an effective pledge of the accounts from Owner. See, e.g., In
Re: HRC Joint Venture, 175 BR 948 (S.D. Oh 1994). The lender will be charged with knowing
and consenting to the terms of the management agreement to the extent not overridden by the triparty terms. The lender should therefore deal with any ambiguity inherent in the management
agreement by express terms in the tri-party agreement.
2
This form refers to the terms and sections of the annotated standard form of hotel loan
agreement.
3
The documentation described here includes the documents which would be normal in a hotel
financing under New York law. In other jurisdictions, the assignment of rents might be an
independent agreement or a deed of trust might replace the mortgage. The essential point is that
a complete hotel collateral package must include the real property interests, the personal property
subject to the U.C.C., and the non-U.C.C. interests. The latter may be material in a hotel context.
1
and agreements given by Owner to Lender in connection therewith are hereinafter collectively referred to
as the "Loan Documents").
D.
Owner and Operator have entered into that certain [management4] agreement
dated as of
, as the same may be amended, restated, modified or supplemented from time to time
with the consent of Lender (such agreement, as in effect from time to time, being hereinafter referred to
as the "Management Agreement"), pursuant to which Owner and Operator provide for the operation of the
Hotel.
E.
As further security for the Loan, Lender has required that Owner assign to
Lender all of Owner's right, title and interest in and to the Management Agreement.
F.
It is to the mutual benefit of Operator and Owner that Lender make the Loan to
Owner, and Operator is willing to consent to the assignment of the Management Agreement to Lender
and to have the Loan Documents constitute a first lien upon the Hotel unconditionally prior and superior to
the Management Agreement to the extent and provided herein.
G.
Lender is not willing to make the Loan unless Owner and Operator agree to
subordinate (i) the Management Agreement and (ii) to the extent set forth herein, Operator's rights,
interests and benefits under the Management Agreement, to the lien of, and all other rights under, the
Loan Documents on the terms and to the extent set forth herein. 5
AGREEMENT:
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1
Definitions.
ascribed to them below:
As used herein, the following terms shall have the meanings
________________________
4
The agreement may be termed an operating agreement or, as is common in international
practice, a license agreement. If the agreement is termed a lease or operating lease, the issues
of lender/operator relationships are substantially more complex and may not be adequately
addressed by this form of agreement.
5
An unfortunate reality of lender/operator relations is that there is a fundamental conflict of interest
between the parties. Operators have, until recently, regarded non-disturbance as an entitlement
and have expected to be continued in management of the property regardless of loan defaults.
Operators may negotiate their management agreements with poorly advised owners before the
lenders are on the scene, and thus present lenders with entrenched documentation. Lenders,
realizing that loan failures may relate directly to management practices and achieving
substantially better recoveries on failed hotel loans when prior management can be removed,
have ceased to offer unconditional non-disturbance. While this shift is well recognized in the
hotel industry, many negotiations of management and tri-party agreements continue to involve
somewhat disguised attempts to undercut the strength of the lender's future position in the event
of a loan failure. Many owners are still told, falsely, that non-disturbance is the industry norm.
2
"Approved Budget" shall have the meaning set forth in Section 8.1 of the Loan
Agreement.
"Assignment of Leases" shall have the meaning set forth in paragraph C of the Recitals
of this Tri-Party Agreement.
"Collateral" shall have the meaning set forth in Article 2 of the Loan Agreement.
"Event of Default" shall have the meaning set forth in Article 14 of the Loan Agreement.
"Foreclosure" shall mean any exercise of the remedies available to the holder of the
Mortgage upon a default under the Mortgage, which results in a transfer of title to or possession of all or
substantially all of the Hotel to such holder, its designee, a purchaser in foreclosure or any other third
party. The term "Foreclosure" shall include, without limitation: (i) a transfer by judicial foreclosure; (ii) a
transfer by deed in lieu of foreclosure; (iii) a transfer of either ownership or control of the Owner, by
exercise of a stock pledge or otherwise; (iv) a transfer resulting from an order given in a bankruptcy,
reorganization, insolvency or similar proceeding; (v) if title to the real property interests included in the
Hotel is held by a tenant under a ground lease, an assignment of the tenant's interest in such ground
lease; or (vi) any similar judicial or non-judicial exercise of the remedies held by the holder of the
Mortgage.6
"Foreclosure Date" shall mean the later7 of the dates on which title to or possession of
the Hotel is transferred to a Subsequent Owner by means of a Foreclosure.
"Hotel" shall mean the Land and all buildings, structures, improvements and
appurtenances located on the Land presently consisting of [
] guest rooms, each with bath; all
restaurants, bars and banquets, meeting and other public rooms; shop units and all other space and
concessions for the sale of merchandise, goods and services; garage and parking spaces; support and
back of the house areas, including kitchens, storerooms and maintenance workshops; recreational, health
club and other health facilities including the swimming pool; parking facilities; public grounds and gardens
located on or constituting all or a portion of the Land, and any rooms, public or private areas or garage
space which may be added to the Land or to any of the foregoing in the future.
"Land" shall mean the interest in real property described in Exhibit A hereto, together with
all easements, servitudes, rights of way, gores of land, streets, ways, alleys, passages, sewer rights,
waters, water courses, water rights and powers, and all estates, rights, titles, interests, privileges,
________________________
6
Some tri-party agreements speak only of the consequences of foreclosure, failing to address the
probability of bankruptcy and the alternatives to formal foreclosure. This broad definition is
intended to preserve the lender's ability to use the full range of restructuring and sale options
after default without reopening the issue of the rights of the operator or requiring a renegotiation
or compensation. Contrary to the assumptions of some lenders, hotels are among the real estate
assets most easily placed in bankruptcy and maintained there against efforts to enforce antibankruptcy provisions. Efforts to subject hotels to single-asset treatment in bankruptcy or to
obtain dismissals of bankruptcy filings have been notably unsuccessful.
7
"Later" preserves a period of at least 180 days for the lender to study the property and, if desired,
conduct negotiations with another manager. Possession prior to title transfer may not include
possession of sufficient records to analyze the value of the operation, and the uncertainty of the
outcome of litigation may discourage negotiations until title is transferred. Equally, title without
possession may also raise material uncertainties and leave the new owner with insufficient
information.
3
liberties, tenements, hereditaments and appurtenances whatsoever, in any way now or hereafter
belonging, relating or appertaining to the Land, and the revisions, remainder, rents, issues and profits
thereof, and all the estate, right, title, interest, property, possession, claim and demand whatsoever, at
law as well as in equity, of the Owner of, in and to the same.
"Lender" shall have the meaning set forth in the first sentence of this Tri-Party
Agreement.
"Loan" shall have the meaning set forth in paragraph B of the Recitals of this Tri-Party
Agreement.
"Loan Agreement" shall have the meaning set forth in the paragraph B of the Recitals of
this Tri-Party Agreement.
"Loan Documents" shall have the meaning set forth in the paragraph C of the Recitals of
this Tri-Party Agreement.
"Management Agreement" shall mean that certain Management Agreement, dated as of
, between Owner and Operator pursuant to which Operator shall operate the Hotel. The term
Management Agreement as used in this Tri-Party Agreement shall include any amendments,
modifications, supplements, replacements or extensions of the original Management Agreement.
"Mortgage" shall have the meaning set forth in Section 6.2(a)(1) of the Loan Agreement.
"Mortgagee" shall mean any of the following: (i) the entity identified as the Lender in the
first sentence of this Tri-Party Agreement; (ii) any successors or assigns of that entity; (iii) any nominee or
designee of that entity (or any other entity described in this definition); (iv) any initial or subsequent
assignee of all or any portion of the interest of that entity in the Mortgage; or (v) any entity which is a
participant in the financing secured by the Mortgage, or otherwise acquires an equitable interest in the
Mortgage, provided that the holder of the Mortgage then of record shall have the power to act as Lender
hereunder for the purpose of giving or receiving notices, consents or waivers or otherwise exercising the
rights of Lender hereunder.8
"New Agreement" shall have the meaning set forth in Section 7.1(a)(2) of this Tri-Party
Agreement.
"Note" shall have the meaning set forth in paragraph C of the Recitals of this Tri-Party
Agreement.
"Notice" shall have the meaning set forth in Section 12.1 of this Tri-Party Agreement.
"Obligations" shall have the meaning set forth in Article 2 of the Loan Agreement.
"Operating Account" shall have the meaning as set forth in Section 7.1 of the Loan
Agreement.
________________________
8
The separate definitions of Lender and Mortgagee may not be needed if participation or colending situations are unlikely to arise. The definition is included here as a reminder that the
problem of multiple lenders or subsequent owners may arise, and the operator may require
assurances that it has a single, reliable representative of the lenders with whom to deal.
4
"Operator" shall have the meaning set forth in the first sentence of this Tri-Party
Agreement.
"Operator's Notice Address" shall mean:
_________________
_________________
_________________
Attn: ____________
Re: ____________
with a copy to:
_________________
_________________
_________________
"Owner" shall have the meaning set forth in the first sentence of this Tri-Party Agreement.
"Owner's Notice Address" shall mean:
_________________
c/o ______________
_________________
_________________
_________________
Attn: ____________
with a copy to:
_________________
_________________
_________________
_________________
Attn: ____________
"Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust,
unincorporated organization, association, corporation, institution, entity, party or government (whether
territorial, national, federal, state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Purchaser" shall have the meaning set forth in Section 7.1(a) of this Tri-Party
Agreement.
"Repayment" shall have the meaning set forth in Section 7.1(c) of this Tri-Party
Agreement.
"Subsequent Owner" shall mean any individual or entity which acquires title to or
possession of the Hotel at or through a Foreclosure (together with any successors or assigns thereof),
5
who may include, without limitation, (i) Mortgagee, (ii) any purchaser of the Hotel from Mortgagee, or any
lessee of the Hotel from Mortgagee, or (iii) any purchaser of the Hotel at Foreclosure.9
"Termination Period" shall mean the period of time which begins on the date on which an
Event of Default occurs10 and ends on the one hundred eightieth (180th) day after the Foreclosure Date.
"Tri-Party Agreement" shall have the meaning set forth in the first sentence of this TriParty Agreement.
"Working Capital" shall mean the excess of current assets over current liabilities,
provided that "current" shall be determined according to realization within a 60-day period.
ARTICLE II
PLEDGE
2.1
Pledge of Management Agreement. Owner hereby grants, transfers, assigns
and sets over to Lender all of its right, title and interest in and to the Management Agreement and the
proceeds of the Management Agreement11, including all interests in accounts maintained by it [or its
agents12] in connection therewith, in accordance with the terms, conditions and provisions of this Tri-Party
________________________
9
Again, this broad definition is intended to include the range of solutions that a lender may want to
consider in a restructuring or other working out of a failed loan, without losing the benefit of the triparty agreement. The operator, in contrast, will want to deem the earliest possible transfer a
third-party sale that reinstates the management agreement according to its original terms.
10
Some lenders want the power to terminate the management company before taking title, by
having the power to require the owner to exercise a termination power. From the view of
exposure to lender liability or equitable subordination, this degree of control over the business
and profitability of the borrower while still in possession may be dangerous. We generally do not
recommend that lenders seek that power. We have also found that some lenders who have the
power decide not to use it, setting up serious waiver issues. The provision for pre-foreclosure
powers of termination is sufficiently common that we include it here, while recommending great
caution in its use.
11
A frequent error is to limit the pledge to the proceeds of the management agreement and not
pledge the total rights therein and thereunder. A proceeds pledge may not be sufficient to create
a security interest in favor of the owner's lender in rents and revenues in the hands of the
operator or to acquire the right to assert the owner’s rights in regard to mismanagement. A
proceeds pledge may also leave all cash subject to the prior possessory security interest of the
operator. Cash and accounts receivable in the name of the management company or its trade
name may not, of course, be U.C.C. interests perfected by a borrower’s filing.
12
Lenders have come to appreciate the importance to their collateral package of how the accounts
are specifically named and held. Accounts held by operators who are not agents are much more
likely to escape lenders. Even with agency, some property may not be accessible as collateral.
Lenders accustomed to non-recourse real property mortgage lending have difficulty accepting the
more approximate nature of lending to operating business. In the latter, the priority of certain
trade creditors, employees, and suppliers who are potential lienors is accepted as a risk of
lending. The concept of "first perfected interest" in every form of collateral is balanced against
realistic limitations arising from what the lender can administer or whether the business may
operate within the terms.
6
Agreement. Such pledge shall be unconditional and absolute, conditional only to reconveyance in the
event that the obligations of Owner to Lender, including the Obligations, are discharged in full. 13
Notwithstanding the foregoing, Lender shall have no obligation or liability of any kind under or with
respect to the Management Agreement unless and until Lender exercises its rights hereunder, and then
only to the extent expressly provided herein.14
2.2
Operator's Agreement. Owner agrees to save and hold Lender harmless of and
from, and to indemnify Lender against, any and all such obligations and liabilities, contingent or
otherwise. Operator hereby acknowledges and consents to the foregoing pledge from Owner to Lender
and agrees to the terms of this Tri-Party Agreement.15
ARTICLE III
REPRESENTATIONS REGARDING MANAGEMENT AGREEMENT
3.1
Representations as to Management Agreement. Owner and Operator 16, each for
itself only, represent to Lender that:
(a)
The Management Agreement has been executed, has not been modified
and is in full force and effect without default.
(b)
Exhibit B hereto is a correct and complete copy of the Management
Agreement. There are no other agreements, written or oral, between Owner and
Operator or any of its affiliates regarding the operation of the Hotel.
(c)
The Management Agreement constitutes the valid and binding
agreement of the parties thereto, enforceable in accordance with its terms, and Owner
________________________
13
Whether a present assignment subject to a reconveyance is required is a matter of local law.
Where this type of assignment language is used, there may be a request from the owner for an
express license to use the benefits of the management agreement prior to default or foreclosure.
Compared to the type of license granted in, for example, an assignment of contracts, the scope of
authority left to the owner in regard to consents, waivers, etc., for its operator's benefit is intended
to be much more limited. More is at risk in any modification or waiver of this very material
contract.
14
Here and in several provisions below, any implied assumption of liability for funding by lender is
intended to be precluded. Unfortunately, lenders are often their worst enemies in regard to
dealings with operators which give rise to equitable estoppel or implied assumption based on
courses of dealing after the tri-party agreement is executed. Lenders should give serious
attention to effective asset management and monitoring covenant compliance.
15
The operator is agreeing in this document to terms that amount to a modification of its
management agreement. Therefore its agreement must go beyond a mere recognition of the
pledge.
16
The inclusion of Operator as a party to these representations is quite important. The
representations here focus on some of the most serious and recurrent areas of dispute between
lenders and operators: unwritten modifications or waivers of provisions of the agreement, offbalance sheets loans or amounts due from owner to management company affiliates, accounts
maintained on terms inconsistent with the management agreement, etc. These should also be
diligence topics.
7
and Operator have full authority under all state or local laws and regulations to perform all
of their obligations under the Management Agreement.
(d)
Neither Owner nor Operator has made any assignment, pledge,
delegation or other transfer of any interest, right or obligation under or in the
Management Agreement, and neither is under any restriction or prohibition in regard to
entering into or undertaking the obligations of this Tri-Party Agreement.
(e)
The accounts listed on Exhibit C are all of the accounts required by or
maintained pursuant to the Management Agreement and are maintained in the name of
Owner by Operator as agent. No revenues of the Hotel are deposited or held in any
other accounts. All expenses of the Hotel are paid from those accounts. All books and
records relating to such accounts are maintained by Operator for the benefit of Owner.
(f)
All fees, expense reimbursements and payments due from the Owner
under the Management Agreement to the date hereof have been paid in full [except for
fees accruing after
].
(g)
Except as set forth in the Management Agreement, neither Operator, nor
any other Person related to Operator has any right or claim to any fees, commissions,
compensation or other remuneration in connection with or arising out of the use,
occupancy and operation of the Hotel.17
(h)
The [audited] financial statements attached hereto are true and correct
as of the date of issue, include all items of disclosure required under GAAP, and fairly
present the operations of the Hotel.18
ARTICLE IV
COVENANTS OF OWNER
4.1
Covenants of Owner as to Management Agreement. Owner covenants to Lender
that:
________________________
17
This representation touches on a particularly difficult issue of the operator's and hotel's
transactions with the operator's affiliates, and the degree to which these transactions may yield a
profit to the operator's group of companies. Operators may find it possible to make this
representation without viewing transactions with its affiliates conducted on a routine basis as
inconsistent with the disclosure. In such a situation, the financial statements' disclosure may be
the only manner in which a lender will learn of the operator's full scope of involvement in the
hotel. The lender should itself review the statements to make sure that they are in fact full GAAP
statements. In practice, many hotels operate with so-called special procedures statements in
which the numbers provided by the management company are carried over and are not ever
subjected to GAAP audit review. This is particularly likely when the hotel and the management
company share the same auditor.
18
These references to disclosure under GAAP and "fair presentation" are intended to reinforce the
question of whether the involvement of the operator has been adequately described. The
financial statements provided to the lender, while nominally the statements of the owner, will be
prepared by the operator's staff in the vast majority of cases.
8
(a)
Owner shall observe and perform all of its respective obligations under
the Management Agreement and shall not by agreement or conduct alter, modify,
terminate or waive any [material19] term or provision of the Management Agreement
without the prior consent of Lender. No amendment or modification of the Management
Agreement shall become effective without Lender's consent.
Any modifications,
supplements, replacements and extensions of the original Management Agreement,
which are made without Lender's prior written consent, shall be voidable at the option of
Lender or any Subsequent Owner.
(b)
Owner agrees to accept performance of Operator in compliance with this
Tri-Party Agreement and the Loan Documents for so long as any obligation of Owner to
Lender remains outstanding and unsatisfied.
(c)
Owner shall not assign, pledge, delegate, waive or transfer any interests,
rights or obligations under the Management Agreement, including the proceeds thereof.
Owner shall not borrow, or accept any forbearance to collect 20, any amount due from it to
Operator or any affiliate of Operator without the prior written consent of Lender.
(d)
In the event that Owner asserts or obtains knowledge of a default by
Operator in performance or breach under the Management Agreement, or for any other
reason gives notice to Operator pursuant to the Management Agreement, notice thereof
shall promptly be given to Lender specifying the default, breach or other matter in
reasonable detail.
(e)
Lender shall be entitled, without obligation to do so, to tender a cure or to
cure any default or purported default in the obligations of Owner. Owner agrees that any
cost incurred by Lender in connection with such cure or attempt to cure shall constitute
an additional advance as a demand obligation of Owner under the Loan Documents and
an Obligation.
ARTICLE V
COVENANTS OF OPERATOR
5.1
Covenants of Operator as to Management Agreement. Operator covenants to
Lender that:
________________________
19
Our preference is to omit "material" and encourage the owner and operator to err on the side of
disclosure. In a normal operating agreement, waivers or modifications should not be routine or
particularly important to efficient operation. Given the propensity of operators to engage in "deal
creep" by applying new practices to old management agreements without express (or any)
consent from owners, a high threshold for modification may be desirable.
20
A particularly recurrent problem for lenders is the discovery that a hotel's underperformance has
been disguised by the operator's slowing of payments to itself. Few owners have the strength to
discourage an operator who is willing to do this to maintain the flow of payments to the owner.
Owners in such situations may fail to appreciate the tactical advantage that the operator gains
from accumulating a large unpaid incentive fee or other amount owing from a distressed owner.
This clause is intended to neutralize the operator's use of such accruals in a restructuring
situation.
9
(a)
Operator shall observe and perform all of its respective obligations under
the Management Agreement and shall not by agreement or conduct permit Owner to
alter, modify, terminate or waive any [material] term or provision of the Management
Agreement without the prior consent of Lender. No amendment or modification of the
Management Agreement shall become effective without Lender's consent.
Any
modifications, supplements, replacements and extensions of the original Management
Agreement, which are made without Lender's prior written consent, shall be voidable at
the option of Lender or any Subsequent Owner.
(b)
Operator agrees that it shall observe and perform the provisions of the
Tri-Party Agreement and the Loan Documents relating to the operation of the Hotel in the
same manner as if those provisions were incorporated in the Management Agreement,
for so long as any obligation of Owner to Lender remains outstanding and unpaid.
Operator however recognizes and agrees that such overriding provisions shall not
constitute amendments of the Management Agreement effective after the satisfaction in
full of the obligations of Owner to Lender. Such provisions shall, however, control over
any inconsistent provisions in the Management Agreement so long as Lender holds an
interest in the Hotel, whether as Lender or through a Subsequent Owner. 21
(c)
Operator shall not consent to or permit Owner to assign, pledge,
delegate, waive or transfer any interests, rights or obligations under the Management
Agreement, including the proceeds, to any other Person. Operator shall not, and shall
not permit any affiliate of Operator to, loan or forebear to collect any amount due to it
from Owner without the prior written consent of Lender.
(d)
In the event that Operator asserts or obtains knowledge of [a default] by
Owner in performance or breach under the Management Agreement, or for any other
reason gives notice to Owner pursuant to the Management Agreement, Operator shall
send a copy of any notice or statement sent by it to the Owner pursuant to the
Management Agreement simultaneously to Lender and by the same manner of
transmittal. On the occurrence of (i) any default under the Management Agreement by
Owner, or (ii) any other event giving Operator the right to terminate the Management
Agreement for any reason, Operator shall promptly deliver notice to Lender detailing such
occurrence with reasonable specificity and stating its intended date of termination.
(e)
Lender shall be entitled, without obligation to do so, to tender a cure or to
cure any default or purported default in the obligations of Owner in accordance with the
provisions of the Management Agreement pursuant to which Owner may cure any such
default or other cause for termination. No termination of the Management Agreement
shall be effective until Operator has given notice to Owner and Lender, pursuant to the
notice requirements set forth in Section 5.1(d) hereof, and forty-five (45) days have
elapsed since the receipt of such notice by Owner and Lender and cure has not been
effected. Operator agrees to accept such tender of cure if made.
(f)
In the event that Lender informs Operator that it elects to Foreclose or
otherwise enforce its remedies against Owner, Operator shall not thereafter seek to
declare a default or otherwise pursue the termination of the Management Agreement
during the pendency of the Foreclosure or other enforcement proceedings, and shall
cease and suspend any action to enforce a remedy or terminate then underway.
________________________
21
This provision is a broad attempt at overriding inconsistent provisions in a management
agreement for so long as the lender may retain an amount at risk in the hotel.
10
Operator shall continue to operate the Hotel pursuant to the Management Agreement and
this Tri-Party Agreement during that action's pendency.
ARTICLE VI
SUBORDINATION OF RIGHTS OF OPERATOR
6.1
Subordination of Rights of Operator. The rights of Operator under the
Management Agreement, including the right to receive payment of fees [and all other amounts 22], shall be
and continue to be subordinate to Lender's rights arising from the obligations of Owner, except as set
forth herein.
6.2
Subordination of Rights of Operator and Affiliates to Payment from Accounts.
Operator, Owner and Lender agree that the establishment of the accounts of the Hotel at a [bank name]
location, and the control of that account by Lender, is essential to the creation and maintenance of
Lender's perfected security interest.23 Operator and Owner therefore agree that:
(a)
All revenues derived from the operation of the Hotel shall be collected as
trust funds24 pursuant to this Tri-Party Agreement and deposited into one of the accounts
as listed on Exhibit C.
(b)
Operator shall transfer such funds to the operating account and/or
payroll account and/or permitted reserve accounts of the Hotel 25 as listed on Exhibit C
________________________
22
Operators and/or their affiliates routinely receive many more payments and financial benefits than
the base fee, incentive fees and reimbursement for chain services usually specified in a
management agreement. A lender's diligence should include a detailed examination of what
payments are actually flowing to the operator, whether there is a profit involved in any of these
other than the incentive fees, and whether the lender should or should not allow these fees to
flow after default. Any order for use of funds in a foreclosure or bankruptcy should detail the
permitted uses, and not allow “amounts due or payable under the management agreement.” This
can be a very expensive error.
23
Lenders differ in their views of how much control is required for perfection. The extreme view is
that the accounts must be established in the name of the lender and a representative of lender
must have some role in the application of the funds in that account. What is required may be
affected by case law or statutory developments during the term of the loan. By specifying the
obligation to cooperate in perfecting the lien, the language is intended to permit flexibility. At the
same time, each lender must appreciate that the burden of complete perfection may not be
tolerable. For example, the involvement of a lender's representative in signing thousand of
checks may be a burden, and may exaggerate the value of perfection over the risk of liability for
engaging in the conduct of the business.
24
The "trust fund" formulation is valuable in pursing funds that have been used or applied
improperly, particularly where the recipient is related to the operator. It also eliminates possible
attack on the theory that the management company was less than an agent or fiduciary by
creating a direct trust obligation. It is also somewhat difficult for a management company at the
outset of a loan to deny that it has this level of obligation.
25
A typical hotel will operate with a receiving account into which revenues are paid by credit card
companies and other payors. Funds from that account will be transferred into the appropriate
(continued)
11
only in accordance with the operating and reserve account budgets most recently
approved in writing by Lender and shall pay out those funds from such accounts only in
accordance with the provisions of the Loan Agreement. All payments permitted under
those provisions shall be made directly to the designated payees and shall not be made
through any sweep or similar aggregation account. 26 All funds derived from the revenues
of the Hotel shall remain trust funds and subject to Lender's continuing perfected security
interest until paid over to permitted payees under the provisions of the Loan Agreement.
(c)
Upon request, Operator shall account directly to Lender, as lender and
secured party, for the use of all funds derived from the revenues of the Hotel.
(d)
Operator shall be entitled to use and apply the funds in its hands only as
set forth in this Section and shall have no other right (including right of offset), title or
interest in the funds. Notwithstanding the foregoing, if any payment is made to Operator
or an affiliate [(i)] in compliance with the Loan Agreement, [(ii) from distributions permitted
to Owner under Section 7.5 of the Loan Agreement or (iii) from sources other than funds
derived from the assets, operations or borrowings of Owner or the Hotel, 27] such
payments shall be made absolutely and shall cease to be trust funds upon receipt by the
payee. [In no event shall payment be made on account of [incentive fees 28] due to
Operator except pursuant to the clauses (ii) and (iii) of the preceding sentence.]
(e)
Upon Operator's receipt of notice of default by Owner in any of Owner's
obligations to Lender (upon which notice, if delivered by Lender, Operator shall be
entitled to rely without separate investigation), Operator shall deposit in an authorized
account listed on Exhibit C and hold all of the funds derived from or used in the operation
of the Hotel for the benefit of and at the direction of Lender. In the event that such default
relates solely to a non-monetary obligation, Operator shall continue to apply funds in the
accounts in the normal levels of priority, except that no distributions whatsoever shall be
made to Owner. In the event that such default relates to a monetary obligation, Operator
shall make no distributions to itself on account of [base fees 29] except as permitted in
Section 7.5 of the Loan Agreement.
________________________
(continued from previous page . . .)
expenditure account as needed. The brand-wide agreements with credit card companies
covering the receiving account may not be specific to the borrower, or even refer to it.
26
Notwithstanding the express terms of most management agreements, there is widespread use of
commingled or sweep accounts controlled by the operator or its affiliated group. Acceptance of
these arrangements undercuts the lender's rights and become extremely problematic in
accounting for the borrower’s true assets and liabilities.
27
The use of new revenues to pay amounts due to operators may be a mixed benefit to a lender.
While it reduces the unsecured obligations of the owner, the terms on which the funds are
received may burden the owner in some other regard and diminish the lender's potential for
repayment. Further, funds represented as new equity may in practice be the product of a hidden
loan arrangement.
28
Or any other payment that represents a profit to the operator or its affiliated group. This is an
issue of aligning the interests of the lender and management company.
29
This is likely to provoke complaints due to the number of other profitable payments that the
operator may derive from the hotel, notwithstanding the fact that the management agreement
alludes only to base and incentive fees.
12
(f)
and after the Foreclosure Date, all cash in the accounts that is in excess
of Working Capital specified in the Approved Budget shall be paid over to Lender or
Subsequent Owner upon demand.
6.3
Subordination of Interest of Operator in other Assets of Owner. Operator agrees
that its interest in the specific assets of Owner shall be subordinate as follows:
(a)
event of a transfer of title of real estate interests included in the Collateral
to Lender or its designee after a default by Owner (whether by the deed deposited
pursuant to [escrow provisions in restructuring agreement] or otherwise), or to any
purchaser in Foreclosure, such transferee shall take title to such real estate interests free
and clear of any interest of Operator or any affiliate of Operator. Operator agrees that
any judgment lien obtained by it or any affiliate shall be junior and subordinate to the
interests of Lender in the Collateral. Lender shall not be required to join or name
Operator and its affiliates as parties in any Foreclosure or other proceeding to effect such
subordination, although Lender may choose to do so for avoidance of doubt or for the
benefit of title insurers.
(b)
In the event of any transfer of personal property, including without
limitation inventory, intangibles, accounts and interests in cash, included in the Collateral
to Lender or its designee after a default by Owner, or to any purchaser in a U.C.C. or
common law foreclosure, such transferee shall acquire such property free and clear of
any interest of Operator or any affiliate of Operator.
(c)
Notwithstanding the foregoing, Operator shall continue to have an
unsecured claim against Owner for amounts accrued and unpaid to it under the
Management Agreement for periods prior to the termination of its operation, including any
claim for incentive fees accrued but required to remain unpaid by the terms of the Loan
Documents. No claim by Operator for termination compensation or damages upon early
termination or arising from debt default shall be allowed. To the extent allowed
hereunder, such permitted claim shall be enforceable by Operator against the assets of
Owner, if any, remaining after satisfaction of the obligations of Owner to Lender. 30
ARTICLE VII
CONTINUATION AFTER TRANSFER
7.1
Continuation after Transfer. Operator and Lender agree:
(a)
In the event that Lender, at its sole option and discretion, intends to
exercise its remedies under the Loan Documents or by any other means allowed under
the Loan Documents or permitted by law, to acquire possession and title to the Hotel
through Foreclosure, (any such acquisition of possession or title being referred to as a
"Foreclosure" and the date of the later of such acquisition of title or possession being
________________________
30
The allowance of any unsecured claim would permit the operator to oppose the lender in critical
aspects of a future bankruptcy. It may also allow the management company to file a competing
bankruptcy plan. If the management agreement or the tri-party agreement will provide for accrual
of incentive fees and other methods by which the operator may come to hold a large unsecured
claim, much more extensive and standard intercreditor terms may be appropriate to protect the
senior lender from being undercut in foreclosure or bankruptcy and to rule out challenges to a
plan, to valuation, or to other critical bankruptcy steps..
13
hereinafter the "Foreclosure Date"), Lender or any purchaser who acquires the Hotel
directly as a result of such Foreclosure or upon a conveyance by Lender after its own
Foreclosure, including without limitation any purchaser who is an affiliate of Lender (any
of the same being hereinafter referred to as the "Purchaser"), shall have the right, at its
sole option and discretion, to:
(1)
elect by notice to Operator, delivered at any time within the
Termination Period, stating that Lender or Purchaser, as the case may be, does
not intend to enter into a New Agreement (as hereinafter defined) with Operator,
and such notice shall result in the termination of the Management Agreement as
of thirty (30) days after the receipt of such notice or such later date as is set forth
in such notice, or such later date as is set forth in such notice and as is within the
period of the Termination Period plus thirty (30) days; or
(2)
elect by notice to Operator, delivered at any time within the
Termination Period, requiring that Operator enter into a new [management]
agreement (the "New Agreement") with Lender or Purchaser, as the case may
be, for the further operation of the Hotel, which New Agreement shall be on the
same terms as the Management Agreement except that (i) the term of the New
Agreement shall be for a term equal to the remainder of the term of the
Management Agreement, and (ii) all references to Owner or to any control of the
Hotel by Owner shall be deleted and replaced by references to the Purchaser;
provided, however, that notwithstanding anything to the contrary in this Tri-Party
Agreement, in no event will Lender or the Purchaser, as the case may be, be
obligated to (A) change, modify or alter any existing condition of the Hotel unless
Lender has previously received a notice indicating an intention to terminate from
Operator with respect to such condition as required by Section 5.1(d) hereof prior
to commencing exercise of its remedies or (B) make advances to Operator or the
Hotel under Article 6 of the Management Agreement.31
(3)
The failure of Lender or Purchaser, as the case may be, to
deliver notices as required under either (1) or (2) above shall be deemed the
equivalent of a notice under (1) above made as of the last day of the Termination
Period, provided, however, that in such case the deemed termination of the
Management Agreement shall be effective as of the 30th day after the
Termination Period.
(b)
In the event that Lender or Purchaser, as the case may be, elects not to
enter into a New Agreement with Operator as provided above, no termination fees shall
be owed by Lender or Purchaser to Operator following any such election. Operator's
rights to compensation for services rendered after the Foreclosure Date shall be limited
to collection from the Operating Accounts of base and incentive fees accruing for that
period under the Management Agreement. Owner shall continue to be liable to Operator
for all fees, charges and indemnifications under the Management Agreement, whether
accruing before or after the Foreclosure Date, provided, however, that any right or
________________________
31
These are merely two of many provisions common in management agreements that a lender will
be reluctant to inherit. The lender should give thorough consideration to all terms in the
management agreement which the lender would not care to inherit or which could discourage a
future purchaser of the asset. In some cases, the New Agreement may be an entirely new,
standby agreement acceptable to the lender. The less left to negotiation upon default, the better
protected the lender.
14
remedy Operator may have to collect such fees, charges or indemnifications from Owner
or the Hotel shall be subordinated to the indefeasible payment in full in cash of all
amounts due to Lender under the Loan Documents.
(c)
Unless and until Lender or Purchaser, as the case may be, elects to
require Operator to enter into a New Agreement as provided in Section 7.1(a)(2) hereof
and Operator does enter such New Agreement, Lender or Purchaser shall have no
liability or obligation to Operator. Any such liabilities or obligations of Lender or
Purchaser shall be limited to those expressly contained in the New Agreement and
accruing after the effective date thereof. In no event shall Lender be responsible for any
fees, costs, reimbursements, termination fees, or other fees, charges and
indemnifications, or for any costs of maintenance, remodeling or upgrades to the Hotel,
or loans or advances or other amounts that were owed by Owner to Operator or were the
obligation of Owner, as the case may be, under the terms of the Management Agreement
prior to the effective date of the New Agreement. Operator shall not be deemed to have
waived any rights it may have to collect such outstanding fees, charges and
indemnifications from Owner which shall continue to be liable for such fees, charges and
indemnifications; provided, however, Operator agrees that such outstanding fees,
charges and indemnifications and any right or remedy Operator may have to collect such
outstanding fees, charges and indemnifications shall be subordinated to the indefeasible
payment in full in cash of all amounts due under the Loan Documents (irrespective of any
reduction of same as an allowed amount in any bankruptcy proceeding), nor shall
Operator place a lien on, attach or otherwise encumber the Hotel or the proceeds thereof.
Should any payment on account of, or any collateral for, any obligation which is
subordinated by the preceding sentence be received by Operator during the continuance
of a default or Event of Default under the Loan Documents, such payment or collateral
shall be delivered forthwith to the Lender by Operator for application to the loans
outstanding under the Loan Documents. Until so delivered, any such payment or
collateral shall be held by Operator in trust for Lender and shall not be commingled with
other funds or property of Operator.32
(d)
Notwithstanding any of the provisions of this Tri-Party Agreement to the
contrary, Lender or Purchaser, at any time after (i) receiving a notice of intention to
terminate from Operator, or (ii) any Event of Default has occurred under any of the Loan
Documents, may elect to, or require the Owner to, cancel and terminate the Management
Agreement effective as of thirty (30) days after written notice to Operator, and neither
Lender nor Purchaser shall have any liability to Operator for any costs, fees,
reimbursements or termination fees owed by Owner to Operator under the Management
Agreement, and such outstanding fees and any right Operator may have to collect such
outstanding fees shall be subordinated in full to the repayment of Lender as set forth in
Section 7.1(c) hereof, and prior to such repayment in full, the Operator will not place a
lien on, attach, or otherwise encumber the Hotel or any proceeds thereof.
________________________
32
This is an abbreviated intercreditor provision for the return of assets from the management
company as a junior creditor. It is here primarily as a platform for enforcement of remedies for
preferential payments to the operator, who is likely to have possession of substantial amounts of
cash during a workout. “Inadvertent” payment of operator affiliates and unsecured creditors is not
unknown.
15
ARTICLE VIII
RELATIONSHIPS
8.1
Relationships. For avoidance of doubt and notwithstanding anything to the
contrary stated or implied from the Management Agreement, this Tri-Party Agreement, or any other
course of dealing between any of the parties, the parties agree:
(a)
Owner enters into this Tri-Party Agreement only as (i) owner of the
[Land] and the Hotel, (ii) borrower from Lender and (iii) [principal] of Operator under the
Management Agreement. No relationship of guarantee party, partner, landlord, joint
venturer or indemnitee for its obligations to third parties is intended or should be inferred.
(b)
Lender enters into this Tri-Party Agreement only as lender to Owner and
holder of a security interest in the Collateral. No relationship of partner or joint venturer is
intended or should be implied.
(c)
Operator enters into this Tri-Party Agreement only in regard to its
engagement as [agent] of Owner under the Management Agreement. No relationship of
guarantor, partner, tenant, joint venturer or indemnitor of obligations of Owner to third
parties is intended or should be inferred. Operator undertakes no obligation to advance
its own funds to Owner or otherwise for the continued operation of the Hotel except as
set forth in the Management Agreement.
(d)
All books, plans, contracts, accounts, receipts, tapes, records and the
like maintained by Operator with respect to the operation, leasing or maintenance of the
Hotel shall, at all times, be and constitute the property of Owner subject to the Loan
Document as part of the Collateral and shall be surrendered to Owner or Lender in
accordance with the terms hereof, without charge or expense. Nothing herein shall
create an agency coupled with an interest and Operator and Employer expressly waive
any such interest.33
ARTICLE IX
INSURANCE
9.1
Insurance. Notwithstanding the provisions of Article 9 of the Management
Agreement, the insurance coverages to be provided by Owner for the Property, together with the required
amounts of such coverages shall be governed by Article 9 of the Loan Agreement [or Mortgage];
however, if Section of the Management Agreement imposes additional insurance requirements on
Owner, Lender shall not object to Owner or Operator obtaining such additional coverages, so long as the
aggregate cost of all insurance does not exceed the amount allocated for such expense in the Approved
Budget.
________________________
33
Until recently, many operators attempted to lace references to agency-with-an-interest throughout
their management agreements. This was thought to be a potential defense to removal at will.
The desire to include those terms is in direct conflict with the interests of the lender.
16
ARTICLE X
CONDEMNATION
10.1
Condemnation. Notwithstanding the Management Agreement, the collection and
distribution of insurance proceeds and condemnation awards, as well as Owner's obligations to rebuild
and repair, and the Owner's or Lender's right to terminate the Management Agreement, in the event of
any casualty or condemnation, shall be governed by Articles 11 and 12 of the Loan Agreement [or
Mortgage].
ARTICLE XI
BINDING EFFECT
11.1
Binding Effect. This Tri-Party Agreement shall be binding on and, to the extent
such successors or assigns are permitted, inure to the benefit of the successors and assigns of Owner,
Operator and Lender.
ARTICLE XII
MISCELLANEOUS
12.1
Notices.
(a)
and all notices required or which either party herein may desire to give to the
other (each, a "Notice") shall be made in writing and shall be given by certified or registered mail, postage
prepaid, return receipt requested, or by recognized overnight courier, such as Federal Express or
Airborne Express, and shall be deemed to be given on the third business day following the date of posting
in a United States Post Office or branch post office or one day after delivery to the overnight courier, and
shall be addressed to Operator's Notice Address or Owner's Notice Address, as appropriate. Copies of
any Notices (a) terminating this Tri-Party Agreement, (b) asserting any default or claim hereunder or any
claim for which Owner is indemnified pursuant to the terms hereof or (c) commencing or relating to any
action, suit or proceeding whether against Owner or Operator relating in any way to Operator's or Owner's
acts or omissions hereunder or any of Operator's or Owner's activities in respect of the Hotel shall also be
sent to ________________________________________ Attention: General Counsel. Either party may,
by notice as aforesaid actually received, designate a different address or addressee for communications
intended for it.
(b)
given hereunder by any party may be given by counsel for such party. The
foregoing Notice provisions shall in no way prohibit a Notice from being given as provided in the rules of
civil procedures of the state in which the Hotel is located, as the same may be amended from time to
time.]
12.2
Non-Competition. So long as this Tri-Party Agreement is in effect, neither the
Operator nor any of its Affiliates shall either directly or indirectly operate or manage a hotel of comparable
average daily rate and quality within the Non-Competition Area without Lender's prior written approval.]
12.3
Lender's Right to Inspect. Lender or its designated representative shall have
access to the Hotel at any time for the purpose of inspecting the Hotel or any portion thereof, protecting
same against fire or other casualty, prevention of damage in the Hotel or any portion thereof, or showing
the Hotel to prospective purchasers or mortgagees.
12.4
Partial Invalidity. In the event that any portion of this Tri-Party Agreement shall
be declared by order, decree or judgment of a court, or governmental agency having jurisdiction, this TriParty Agreement shall be construed as if such portion had not been inserted herein, except when such
17
construction would operate as an undue hardship on Operator or Owner or constitute a substantial
deviation from the general intent and purpose of such parties as reflected in this Tri-Party Agreement.
12.5
Time of the Essence. It is expressly agreed that time is of the essence with
respect to the obligations of Operator under this Tri-Party Agreement.
12.6
Lender Discretion.
Notwithstanding anything hereto to the contrary, the
commencement and prosecution of Foreclosure proceedings under the Mortgage is a matter entirely
within the discretion of Lender. No delay, modification, forbearance or other act or omission of Lender in
respect of Foreclosure shall modify or waive the terms of this Tri-Party Agreement.34
12.7
Gender. The use of the neuter gender in this Tri-Party Agreement shall be
deemed to include any other gender, and words in the singular number shall be held to include the plural,
when the sense requires.
12.8
Modification, etc. The provisions of this Tri-Party Agreement shall not be
modified, amended, waived, discharged or terminated except by a written document signed by all of the
parties hereto. In the event the Management Agreement shall be amended, modified or supplemented,
the Management Agreement, as so amended, modified or supplemented, shall continue to be subject to
the provisions of this Tri-Party Agreement without the necessity of any further act by the parties hereto.
12.9
Further Assurances. (a) Operator shall execute such documents, estoppels and
agreements as Lender, or any third party specified by Lender, may require to evidence Operator's
consent to or waiver of any claim against the transfer of the Hotel and its undertaking to (i) continue to
operate the Hotel pursuant to the terms of the Management Agreement or New Agreement, and (ii) grant
each Subsequent Owner the same rights as Owner holds under the Management Agreement or New
Agreement to implement an orderly transfer of the books, records, and reservations in the event of any
Transfer to such successor.
(b)
The parties hereto agree to execute, acknowledge, deliver and record such
certificates, amendments, instruments, and documents, and to take such other action, as may be
necessary to carry out the intent and purposes of this Tri-Party Agreement.
12.10 Estoppel Certificates. Operator shall, at any time and from time to time upon not
less than thirty (30) days' prior written notice from Lender, execute, acknowledge and deliver to Lender, or
to any third party specified by Lender, a statement in writing: (A) certifying (i) that the Management
Agreement is unmodified and in full force and effect (or if there have been modifications, that the same,
as modified, is in full force and effect and stating the modifications) and (ii) the date through which the
management fees due under the Management Agreement have been paid; (B) stating whether or not to
the best knowledge of Operator (i) there is a continuing default by Owner in the performance or
observance of any covenant, agreement or condition contained in the Management Agreement, or (ii)
there shall have occurred any event which, with the giving of notice or passage of time or both, would
become such a default, and, if so, specifying each such default or occurrence of which Operator may
have knowledge; and (C) stating such other information as Lender may reasonably request. Such
statement shall be binding upon Operator and may be relied upon by Lender and/or such third party
specified by Lender as aforesaid.
________________________
34
This clause is intended to protect the lender from lender liability claims by the operator based on
purported injury from the timing of the lender’s actions. Either longer or shorter periods may be
argued to have been less damaging to the operator and owner.
18
12.11 Counterpart Execution. This Tri-Party Agreement may be executed in any
number of counterparts, each of which shall be effective only upon delivery and thereafter shall be
deemed an original, and all of which shall be taken to be one and the same instrument, for the same
effect as if all parties hereto had signed and the same signature page. Any signature page of this TriParty Agreement may be detached from any counterpart of this Agreement without impairing the legal
effect of any signatures thereon and may be attached to another counterpart of this Tri-Party Agreement
identical in form hereto but having attached to it one or more additional signature pages.
12.12 No Third Party Beneficiaries. Owner, Operator and Lender acknowledge that this
Tri-Party Agreement is solely for their own benefit and that of their successors and assigns, and that no
third party shall have any rights or claims arising hereunder, nor is it intended that any third party shall be
a third party beneficiary of any provisions hereof.
12.13 Waiver, Entire Agreement. No modification, amendment, discharge or change of
this Tri-Party Agreement, except as otherwise provided herein, shall be valid unless the same is in writing
and signed by the party against which the enforcement of such modification, amendment, discharge or
change is sought. No waiver of any breach of any covenant, condition or agreement contained herein
shall be construed to be a subsequent waiver of that covenant, condition or agreement or of any
subsequent breach thereof of this Tri-Party Agreement. This Tri-Party Agreement contains the entire
agreement between the parties relating to the transaction contemplated hereby, and all prior or
contemporaneous agreements, understandings, representations or statements, oral or written, are
merged herein.
12.14 Captions. Titles or captions contained in this Tri-Party Agreement are inserted
only as a matter of convenience, and for reference only, and in no way limit, define or extend the
provisions of this Tri-Party Agreement.
12.15 Interpretation. In interpreting this Tri-Party Agreement, the provisions in this TriParty Agreement shall not be construed against or in favor of either party on the basis of which party
drafted this Tri-Party Agreement.
12.16 Governing Law. This Tri-Party Agreement shall be governed and constructed in
accordance with the laws of the state [in which the Land is located] [of ____________].
12.17 Owner's Limited Liability. No general or limited partner in or of Owner, whether
direct or indirect partners in such partnerships or any disclosed or undisclosed officers, shareholders,
principals, directors, employees, partners, servants or agents of the Owner or any of the foregoing or any
investment adviser of Owner (including any assignee or successor of Owner) or other holder of any equity
interest in Owner, shall be personally liable for the performance of Owner's obligations under this TriParty Agreement. The liability of Owner (including any assignee or successor of Owner) for Owner's
obligations hereunder shall be limited to Owner's interest in the Hotel and the proceeds of insurance
coverage described in Article 9 of the Loan Agreement, subject to such exceptions to limited recourse as
are set forth in the Loan Agreement.35]
12.18 Compliance with Equal Opportunity Law and Regulations. During the term of this
Tri-Party Agreement, Operator and anyone authorized to act for Operator shall comply with the provisions
________________________
35
Very few of the issues arising under a tri-party agreement are suitable for non-recourse treatment
because damage remedies are not generally in issue. Most disputes under these agreements
involve equitable or injunctive remedies, as to which the ability to reach and bind individuals is
quite important. They may also involve bankruptcy proceedings as to which recourse is not
relevant. A broad non-recourse provision may therefore not be acceptable.
19
of Title VII of the Civil Rights Act of 1968, as amended, and Executive Order 11063; Titles VI and VIII of
the Civil Rights Act of 1964 and where applicable, Executive Order 11246, as amended, and all
applicable state and local news. Neither Owner, Operator nor anyone authorized to act for such parties
shall, in the rental, lease, sale, provision of services or any other manner, discriminate against any person
on the grounds of race, color, creed, religion, sex, national origin, or any other basis prohibited by law. 36
12.19 Jury Trial Waiver. Owner and Operator hereby waive a trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against the other in respect of any
matter arising out of or in connection with this Tri-Party Agreement.]
12.20 Liens. This Tri-Party Agreement shall not create an interest in real property and
it shall not be recorded in the public records of any jurisdiction. Notwithstanding anything to the contrary
contained herein, neither Operator nor any officer, partner, representative or agent thereof shall be
entitled to place, file or record a lien against the Hotel on account of any sums alleged to be due and
payable to Operator hereunder.37
[Conform provisions to other related agreements in the transaction.]
In witness whereof the parties have executed this Tri-Party Agreement as of the date first
written above.
LENDER
By:________________________
OWNER
By:______________________
OPERATOR
By:_______________________
________________________
36
This is a reminder that the pledge of a management agreement brings a lender closer to the
issues which arise in operating businesses.
The ability to influence matters such as
compensation and hiring may bring with it disclosure and compliance obligations not previously
appreciated. Unlike generic real estate lending, hotel lending requires lenders to deal with
participation in operations. Asset management in this context is not highly elective.
37
The desire to record on the part of the operator is another symptom of the operator's efforts to
entrench itself against the rights of a principal against its agent. Recordation should be strictly
resisted, as should any quasi-lease or quasi-tenancy language such as “quiet possession” or
references to delivery of possession.
20
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
EXHIBIT B
MANAGEMENT AGREEMENT
EXHIBIT C
AUTHORIZED BANK ACCOUNTS